ICSC RECon 2019: Retail Developers Cautiously Optimistic Amidst Shifting Economy
The retail real estate world is still optimistic yet concerns about a potential market correction are dampening the positivity retail owners and developers felt last year. However even with that threat looming, retail investors plan to keep the deals flowing in 2019 and 2020.
Retail real estate owners, developers, and brokers shared those sentiments and more with KeyBank Real Estate Capital® at the 2019 International Council of Shopping Centers’ RECon, the largest annual gathering of retail real estate professionals. Once again, KeyBank surveyed attendees about their market perceptions and plans for the year ahead.
Key Learning Points
- Retail owners and developers surveyed at ICSC RECon continue to be optimistic about the industry, but not as positive as they were in 2018.
- Deal making remains strong, even as fears of a bubble loom.
- Retail owners and developers see the greatest opportunity in expansion and new development.
- Most respondents expect to have increased deal volume over the next three years.
- The prospect of a market downturn or correction is the greatest concern currently for retail real estate professionals.
About the Respondents
Key surveyed a mix of attendees representing owners, developers and brokers in the retail sector. Owner-developers and brokers each represented about 35%, while another 20% described themselves as owners and 10% described themselves as developers.
The respondents varied in size, representing a range of gross asset value of their commercial real estate portfolios from less than $100 million (54 percent) to more than $1 billion (8 percent). They are active across retail segments, including strip center (16%), grocery-anchored (17%), single tenant (17%) and regional malls (8%).
Optimism Tempered, But Still Strong
Once again, more respondents reported feeling optimistic than pessimistic about the year ahead, but the strength of that optimism has dimmed since 2018. In 2019, about one-fifth of owners, developers and brokers said they were “very optimistic about the retail real estate industry over the next 12 months” compared to one-third in 2018. Similarly, 37% said they were “somewhat optimistic,” down slightly from last year’s 45%. However, only 13% said they were “somewhat pessimistic” about the coming 12 months.
Respondents are also being more cautious with their outlook on real estate fundamentals – vacancy rates and rental rates – in 2019. While in 2018 nearly 60 percent said they expected retail real estate fundamentals to improve, in 2019 34% expect retail fundamentals to improve and another 40% expect them to remain the same.
Retail Investors Expect to Be Active Dealmakers
Our survey also probed whether retail owners and developers would be moving to expand or shrink their portfolios over the next three years. The bottom line is that owners, developers and brokers plan to be active. When asked if they expect their current deal volume to increase or decrease over the next three years, more than 40% said they expect deal volume to increase 5 to 10% and more than 30% expect it to increase 11 to 20%.
In 2019, nearly 30% of those surveyed said they saw the greatest opportunity for growth in their business over the next 12 months to be expansion and redevelopment. Property acquisition, disposition and renovation each were chosen by 15% of respondents, and 11% said they see opportunity in a major redevelopment. With the emphasis on expansion, renovation and redevelopment, players in the retail sector will be looking for debt and equity sources.
What’s Keeping the Retail Sector Up At Night?
Fears of an impending bubble burst are growing. When asked about the biggest challenge or obstacle facing their organization in the next 12 months, more than 40% of those surveyed said a real estate or financial bubble, increasing significantly from 15% the previous year. Meanwhile, last year’s biggest worry, increasing interest rates, has dropped to 13% from about 50%, and governmental policy change or regulatory uncertainty held steady at 15%.
Competition from e-commerce continues to be a concern for about 20% of our respondents. And more than a quarter also named online retailers and Amazon as something “keeping them up at night” related to the retail CRE industry. Yet, these challenges that are specific to the retail sector are becoming overshadowed by macroeconomic shifts.
What’s Next for Retail Owners and Investors
With a growing number of respondents saying a recession or market downturn was keeping them up at night, retail real estate developers and investors are facing the same uncertainty about the market and where it’s headed as real estate investors in every sector. Yet, they aren’t letting their worry slow them down just yet. Retail owners and developers are still actively looking for opportunities, especially in expansions, acquisitions and renovations.
To discuss the results of this survey and how these trends may impact your portfolio or your next deal, connect with Norm Nichols and his income property team at Norman_V_Nichols@keybank.com.
To learn more, visit key.com/rec.